18 Nov 20 -Markets Take a Breather | NZR Fades Energy Rebound

18 November 2020

Global markets were mixed overnight (S&P 500 index -0.5%) as stocks pulled back from record highs as investor focus turned to the surge in virus cases and new lockdown measures. We think some profit taking after such a strong rally is normal.

In stock news, Tesla jumped on news the carmaker will join the benchmark S&P 500 US market index, while pharmacy chains dropped after Amazon unveiled a new push into selling prescription drugs. In Europe, travel and leisure companies led declines as more lockdown rules were announced

NZ Refining (NZR:NZX)
While energy stocks and company’s such as Z Energy have recovered in recent weeks, the same can not be said about NZR shares.
NZR recently confirmed it will operate on a cash neutral basis (at worst), until at least the end of the 2021 financial year. It will achieve this goal by reducing refinery operating capacity. However, critical to the value of NZR is the outcome of the terminal conversion discussions which remain ongoing. NZR provided no indication of when discussions will conclude. Given the wide range of possible value outcomes (some of which are lower than the current share price) and challenges of dispute from some customers (Z Energy, BP & Mobil) we retain our Hold rating.

The Company has finalised its proposal to operate the refinery in 2021 under the current Processing Agreement, which will enable it to extend cash neutral operations in a low-margin environment at the Fee Floor. We believe that NZR will likely convert to an import terminal. The value outcomes for NZR remain wide and depend heavily on conversion costs (NZR is keeping that figure confidential given current negotiations) and import terminal & pipeline fees under an import model.

NZR’s share price has been heavily beaten down on this negativity. NZR’s plan to shift to become cash flow neutral for 2021, to operate as a smaller business possibly changing to an import model could be interesting, but Mobil's decision to file a notice of dispute under the Processing Agreement will likely delay final discussions. Uncertainty is high and we prefer to avoid NZR.


Australia & New Zealand Market Movers

The Australian market was higher on Tuesday (ASX 200 Index +0.2%) with the ASX hitting a 9-month high as investors continued to rotate into value stocks and took profits out of technology winners such as Afterpay.

Energy stocks were among the market's best performers, as the price of oil rose, supported by hopes a vaccine would fuel an increase in global crude demand. Investors were keen on property stocks, with a vaccine likely to mean workers return to the office and shoppers return to bricks and mortar retailing. Scentre Group climbed 4% and Mirvac Group added 3%.

The New Zealand market was in small positive territory yesterday (NZX 50 Index -0.1%) as a second promising vaccine saw investors shift money into mid-size companies that have been slower to recover from the pandemic.

Z Energy continued to trend higher as investors bet the vaccine would help clear a path for fuel volumes to recover to pre-covid levels. With international travel on hold, lower jet fuel consumption has been hurting revenue. Air New Zealand, Kathmandu, SkyCity Entertainment, and Auckland International Airport all rose as well.

In stock news, Investore Property was higher after reporting a 9.4% portfolio valuation gain to a shade off $1 billion, at $980.3 million. Chair Mike Allen said the performance was testament to its focus on large format and retail property, and resilience to the impacts of covid-19.
Amazingly, New Zealand’s house price to income ratio has climbed to a new record high a 7.65x. In Auckland the ratio is 10.1x.


3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​Second wave COVID-19 news is back at the top of headlines with social distancing measures being re-introduced, while vaccine developments are also front-of-mind.
  2. Highlights this week include the latest employment data in Australia and earnings from Aristocrat, Ryman Healthcare, Orica, Serko and Napier Port Holdings.
  3. The AGM season continues with Afterpay, a2 Milk, Pointsbet Holdings, REA Group, Precint Properties, Altium, BlueScope Steel, Goodman Group, Mirvac, Resmed, Seek, Lendlease and Kogan.com scheduled to meet with shareholders


Global markets were mixed overnight (S&P 500 index -0.5%) as stocks pulled back from record highs as investor focus turned to the surge in virus cases and new lockdown measures. We think some profit taking after such a strong rally is normal.

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